Karnov Group AB (publ)

Welcome everyone to Karno Group's earnings conference where we will present the outcome of the second quarter of 2025. Please go to slide two. I'm Pontus Bulusson, President and CEO of the company. With me I have our CFO Magnus Hansson and our Head of Investor Relations Erik Bergen. Magnus and I will present the outcome of the quarter using a few slides and then we'll open up for questions. With that said let's get started with the presentation. Please go to slide three. In Q2, we achieved solid growth with continued AI momentum and improved the margins. Customers are adopting our AI solutions with high satisfaction and usage is increasing steadily. We continue to advance our positions and will enter the market for AI-powered workflow tools this autumn. I'll come back to that later in this presentation. Net sales grew to 649 million SEK in the quarter. The organic growth was 5%, driven by strong online sales in Region North, including customers adopting our AI solutions. The adjusted EBITDA margin improved to 23%, which is an improvement of 2 percentage points compared to Q2 previous year. Leverage was 2.5 times well below our financial target. Please go to slide four. We are pleased with the accelerated organic growth and margins improvement in Q2. The legal market is progressing in the shift to AI supported solutions and our AI assistant is a leading AI solution for legal research in our markets. Our customers become significantly more efficient and customer satisfaction is high. We have a solid momentum and progress with AI sales. In Q2, AI sales was an important component of the accelerated growth in Region North. We are still early in the adoption curve. The accelerated growth and margins improvement in Q2 is driven by Region North. We are decisive in the reshaping of Region South. The financial performance in Q2 is below our ambitions. Margins declined in the quarter as books and sales of training courses were weak, especially in Spain. As a first step, we have divested the Spanish training business. Excluding the training business, the margin would have been 1.5 percentage points higher in Q2 in Region South. I'll come back to our ambitions for Region South in a few slides. Next slide, please. Carnav Group is well positioned for AI-powered legal workflow tools, thanks to our mission-critical local content and strong customer relationships. All our AI solutions are co-developed by Carnav's tech team, legal domain experts and customers ensuring trusted results, seamless adoption and measurable productivity gains. This autumn, customers will benefit from our AI-powered workflow tools that identify risks and propose legal improvements. By combining our customers' own documents and Kano's proprietary content, we will not only broaden the scope of work we support, but also deepen the value we deliver to our customers. This is our entrance into the market for AI and content-powered workflow tools. If I were to explain Carnov's new step to someone who isn't a lawyer, I would probably use the following analogy. It's like moving from offering the best legal map to also providing a GPS for legal work. Next slide, please. In this slide, you can see our two cost efficiency initiatives running until the end of 2026, with the ambition of harvesting efficiencies of 20 million euro in total. At the end of Q2, we have achieved annual run rate synergies of 18 million euro. We progress ahead of plan. Next slide, please. I want to present our segment performance, starting with the region north. Region North continues to perform exceptionally well, both in terms of organic growth and profitability. The organic growth of 13% is driven by higher subscription-based online sales, including AI uplifts. However, we are still early in the adoption curve. In addition, our EHS businesses are expanding their customer bases and attracting new clients. Margins are continuing to improve, primarily due to operational leverage from higher net sales, but also thanks to positive synergy effects from our acceleration initiative. Next slide, please. The financial performance in region south in Q2 is below our ambitions. Our French business generated solid growth in the quarter, driven by online sales as we are attracting new customers. Our Spanish business generated online sales growth while the sales of books and training courses were weak. We are not pleased with these results as they offset the effects of our cost efficiency efforts. At the end of July, we divested the Spanish training business and we will do more product rationalizations of unprofitable products. Excluding the training business, the margin would have been 1.5 percentage points higher in Q2 in region south. With the quarterly performance in Q2 is below our ambitions, I remain confident in our medium term financial targets for Region South. The Spanish merger is completed and we can reap the full benefits of our strong local proprietary content. In France, our flagship products generate strong interests from the market. We are now preparing to fully bring our AI experiences from Region North to Spain and France. Next slide, please. With that said, I will now hand over the floor to our CFO, Magnus Hansson. He will tell us more about the financial results. Magnus, the floor is yours. Thank you Pontus.

So let's start with an overview, switching to slide 10. In Q2, we achieved net sales of 649 million SEK, a solid net sales growth of 4%. The growth is driven by increased online sales, including selling more licenses to existing customers, higher tier packages, AI uplifts, and attracting new customers. Currency effects had a negative impact on net sales of 4%. Last 12 months, group net sales grew by 6%. Please go to slide 11. Breaking down net sales on segment level, we see continued strong organic growth in Region North and negative growth in Region South in the quarter. Region North had organic growth of 12.6% thanks to strong online sales performance, while Region South declined 1.7% due to weak offline sales, in particular books and training course sales in Spain. Negative currency effects are further contributing to the decline in Region South. Revenues from AI sales is increasing quarter by quarter as the subscription revenues are recognized over the contract period. Next slide, please. On slide 12, you see the net sales development within online and offline, split into segments. In Region North, the online sales increased by 17% compared to Q2 last year and accounted for 96% of the net sales in the quarter. In Region South, the online sales grew by 3% compared to Q2 last year and accounted for approximately 81% of net sales in the quarter. Organic online sales grew by 4% in Region South. Please change to slide 13. Subscription-based sales increased during Q2 and represent 89% of sales in the quarter. The flat development in subscription-based sales in Region South is related to negative currency effects and the negative offline sales in Spain. The online subscription sales constant currency grew by 3% in Region South. Please change to slide 14. The adjusted EBITDA amounted to 148 million SEK in the second quarter. This corresponds to an adjusted EBITDA margin of 23%, which is an improvement of two percentage points. Last 12 months, adjusted EBITDA increased by 116 million SEK and reached 24%. Synergies are coming through as expected, meaning personal expenses are decreasing. Items affecting comparability amounted to 46 million SEK during Q2 and our restructuring and post merger costs in region south. At the end of Q2, we have achieved synergies within the group of 18.1 million euros on an annual run rate basis. The effect in the quarter compared to baseline amounted to 4.1 million euros. We are progressing according to plan to achieve synergies of 20 million euros with full effect on an annual run rate basis by the end of 2026. Let's move on to slide 15, please. In Q2, net sales amounted to 320 million SEK in Region Nord. Organic growth was 12.6%. The growth is driven by online sales. We continue to strengthen our market position and attract new customers. Adjusted EBITDA reached 165 million SEC in Q2. This is an increase of 45 million SEC compared to last year. The adjusted EBITDA margin amounted to 44.2%. The improvement is due to operational leverage from increased net sales and efficiencies from the acceleration initiative. Please move on to slide 16. which is the Region South segment. Net sales in Region South declined by 19 million SEK compared to Q2 of last year. Currency effects had a negative impact of 16 million SEK in the quarter. Our French business grew by 2% while the Spanish business declined by 3%. Growth in France is driven by online sales while the decline in Spain is driven by weak book and training course sales. The adjusted beta margin was 8% in the second quarter, which is well below our ambitions. The decline is driven by weak book and print, sorry, book and training sales, as well as higher depreciations due to completed development projects. We continue to invest in the French business and allocate AI resources for future growth. Synergies are coming through according to plan, but are offset by the weak offline sales. Compared to baseline, the cost base has decreased by 23 million SEK in Q2. Excluding the divested training business, the adjusted beta margin would be 1.5 percentage points higher in Q2. Moving to slide 17, which presents the segment group functions. Expenses in Q2 was 20 million SEK. Please go to slide 18. Q2 is typically a cash-neutral quarter. The adjusted free cash flow was negative 3 million SEK, which is slightly lower than Q2 last year. Leverage was 2.5 times EBITDA last 12 months by the end of June, well below our financial targets. I'm now handing over to Pontus again, who will present our last slides.

Thank you, Magnus. Please switch to slide 19. In Q2, Carnum Group delivered accelerated growth and solid margin improvements thanks to strong performance in Region North. AI adoption is gaining momentum with our AI solution driving measurable customer efficiency. In Region South, we are reshaping the portfolio for profitable growth, while the financial performance in Q2 was below our ambitions. The Spanish training business was divested at the end of July. These customers will benefit from our AI-powered workflow tools that identify risks and propose legal improvements. By combining our customers' own documents and Cano's proprietary content, we will not only broaden the scope of work we support, but also deepen the value we deliver to our customers. Please go to slide 20. And by this I'll end our presentation and we are now ready to take questions. So I'll hand over the conference again to our host.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Predrag Savinovic from DNB Carnegie. Please go ahead.

Hi, good morning, Magnus Pontus and Erik, and thanks for taking my questions. Let me start by unpacking North a little bit. So on the accelerated sales here between Q1 and Q2, this seems to be mainly AI upselling on existing customers, as you phrased it.

um what is the contract longevity here typically is it like three months is it more trial based or is it annual contracts uh hi product and thank you for the question uh it's uh we we sell ai the same way we sell all our online products so it's uh it's typically annual contracts okay so this basically then means that

given this this is quite a big jump in organic growth between q1 and q2 that this should probably be consistent then for for q3 and q4 as well all else equal right we we should be able to extrapolate this this organic trend for h2 right yeah we we we of course don't uh um

answer questions regarding forecasts and so on. But what we can see in in Q2 is, is a strong development within the AI revenues. And that's, of course, based on the on the subscription base. There's also of course, uh other areas which are performing quite strong in the quarter uh for example uh the public sector is is performing really well in region north uh ehs is performing really well so there's a number of uh different components to it uh but yes uh ai is performing well all right and most of this kind of between the quarter performance is still you know it's it's a the typical

annual contract structure even if it's the public or you just yeah good and then on on the south margin I see the 1.5 percentage points remarks that you that you did but shouldn't the margin still be expanding year-over-year considering the synergies you have been realizing and you know run rate etc

Yeah, we are, as Pontus mentioned, not at all pleased with the result in Region South in this quarter. The one explanation is, of course, the training course business in Spain. But we're also investing in future growth in Region South. We are, as you know, investing in the sales team in France. We are investing in AI. uh features and so on so it's a it's a combination of uh making sure we we achieve our synergies and the training courses and also of course investing in the in the future and and then i mean a follow-up on on that shouldn't the margin also be helped if if offline sales become a smaller share of sales which seems to be

the case now in in the second quarter yes and online growth shouldn't that help help you yes it should so typically so online sales have a higher gross margin of course than than offline okay so I still think it's a little bit difficult to understand kind of the the margin margin the margin drop but then i guess you know if you're investing investing more than you're raising the cost at the same time while you're you're taking cost out um is that the right way to to see it okay that's absolutely that's one of the factors absolutely okay thanks that's that's all for me i'll jump back in line thank you the next question comes from thomas from nielsen please go ahead

Hello, thank you for taking my question. In Q2 we saw a negative adjusted free cash flow despite stronger EBIT. Can you explain the main drivers of the working capital swing?

Yeah, so there's a quite strong seasonality to our cash flow. So typically the cash flow is in region north really strong in Q4, beginning of Q1 and in region south in Q1. And then typically then q2 and q3 are quite neutral as we of course invoice annual in annually in advance and we get that seasonality and also you you could also argue that as the offline sales in region south is decreasing and and the offline sales has a higher degree of transactional sales that will also impact the the cash flow in in q2 but seasonality is the main driver it's typically neutral cash flow quarters in in q2 and q3 okay okay thank you and free cash flow generation was strong in the first half of the year overall with 276 million in cash flow from operating activities

What confidence do you have in converting adjusted EBITDA into cash at the targeted 90% to 100% level for the full year?

Yeah, so again, with the seasonality, the Q1 is really strong as we invoice annually in advance. And we will have, of course, the same effect in Q4 this year as we usually do with strong invoicing. The second thing I would argue is that as we decrease our IACs going forward, as we are closing down, or not closing down, but we're closer to the end of the cost initiatives in both the PMI and the acceleration initiative, we will see a better cash flow going forward.

Okay, thank you very much.

Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.

Okay, thank you everyone for listening and thank you for your questions. We will disclose our Q3 report on the 12th of November and we hope to hear from you then, of course, if not earlier. Thank you.

Thank you.